Last week I participated in a webinar and a Twitterview with DerivSource, covering the changing landscape of risk management in the new OTC derivatives workflow model. It goes without saying that risk is at the center of regulatory reform; the new world of risk management must develop to meet the new requirements and challenges facing the OTC derivatives markets.
During the Twitterview in particular, DerivSource boiled down several big questions about drivers of change with regard to risk management today. It’s amazing how much you can actually discuss in a few simple tweets. This Twitterview, under the #derivrisk hashtag, touches on drivers and changes to risk management in the OTC derivatives markets, credit valuation adjustment (CVA), risk with relation to CCPs and potential strains on liquidity, the role of “real time” in risk, and more.
If you missed this risk management Twitterview with DerivSource, search #derivrisk or follow the full Q&A below. And as always, if you have your own questions about risk management in the changing OTC derivatives landscape, leave me a comment or ask me on Twitter to continue the conversation.
QUESTION: What is the biggest driver for risk mgmt improvements – transparency requirements or new risk in the new OTC model? #derivrisk
MARCUSCREERISK: New risks in the OTC clearing space are a far bigger driver for risk mgmt in my opinion…The FCM world is facing longer tenors, and more complexity than it has hitherto known #derivrisk
QUESTION: What is the biggest change impacting pre-trade risk mgmt for firms participating in the new OTC derivatives market? #derivrisk
MARCUSCREERISK: Understanding the longer term impact on the portfolio, and on the margin requirements, of any new trade… A deteriorating position in a longer dated trade could cause serious liquidity issues #derivrisk
QUESTION: How are firms improving market risk mgmt to support the new OTC derivatives model? #derivrisk
MARCUSCREERISK: We are seeing a great deal of proactive improvements w/ firms looking to… Leverage the risk experiences of the bilateral world and to tightly manage VaR driven margin requirements #derivrisk
QUESTION: What challenges do firms face in improving credit risk mgmt to support the new OTC model? #derivrisk
MARCUSCREERISK: Credit risk is less of an issue w/ central clearing. It’s replaced by potentially more dangerous liquidity risk… Credit risk remains central focus for bilateral trading, w/ firms bolstering collateral management & CVA measurement #derivrisk
QUESTION: What about credit valuation adjustment activities (CVA)? What is the driver behind improvements to #CVA activities? #derivrisk
MARCUSCREERISK: Controlling #CVA on bilateral trading enables front office to directly control its credit risk profile… It’s also interesting how different models are emerging from advisory to CVA-specific trading desks #derivrisk
QUESTION: Clearing via CCPs for some swaps introduces new liquidity strains. How will risk mgmt change to mitigate new liquidity risks? #derivrisk
MARCUSCREERISK: Since margins are determined, in part, by VaR-based models, firms can approximate & stress expected margins… This is the foundation of a working #riskculture and the best defense against liquidity risks #derivrisk
QUESTION: Is real-time risk management necessary to support trading and clearing OTC derivatives going forward? #derivrisk
MARCUSCREERISK: Real time is an interesting topic. The risk that cleared OTC trades carry is liquidity/margin based… Margin is driven by VaR models, using clean end-of-day data. As new trades enter portfolios, they need… to be reflected as they happen, but real time pricing has a far smaller impact #derivrisk
QUESTION: Enterprise-wide risk mgmt – a buzz term or necessity to support newly regulated OTC market? #derivrisk
MARCUSCREERISK: This was, is and should continue to be the focus and aim of all financial firms… Risk taking is what firms do. Understanding risk at all levels is vital 4 controlling biz & underlying risk takers within biz #derivrisk
QUESTION: What advice would you give a CRO struggling to make sense of how risk mgmt will change in the new OTC derivatives market? #derivrisk
MARCUSCREERISK: Call @SunGard! Seriously, the key is “risk” has not really changed at all. Best practice has become regulation… and to a certain extent, liquidity risk has been increased at the cost of decreasing credit risk… The need for a strong risk culture underpinning the firm has always been there, now it’s just more obvious #derivrisk